By NEIL HARTNELL
Tribune Business Editor
Moody's is predicting that the government will overshoot its 2019-2020 deficit target by more than $82m and take longer than anticipated to produce the budget surplus it is seeking.
The international credit rating agency, in its latest update on The Bahamas' sovereign creditworthiness, forecast that the deficit for this current fiscal year will come in at 1.6 percent of economic output - a sum equivalent to $219.2m.
This is some $82m higher than the $137m worth of "red ink" projected when the Budget was unveiled in May, with the government then voicing its optimism that the deficit - which measures by how much government spending exceeds revenue - would hit the one percent of GDP demanded by the Fiscal Responsibility Act.
Moody's, though, justified its more cautious assessment of The Bahamas' push to slash nine-figure annual deficits on the basis of the government's consistent past inability to hit its fiscal objectives.
"The government is targeting a deficit of one percent in 2019-2020, and 0.5 percent in 2020/-2021," Moody's said. "Because the government has not yet established a track record under its new fiscal rules, our baseline projections are slightly more conservative than the government's.
"We expect a fiscal deficit of 1.6 percent of GDP in 2019-2020, and deficits slightly wider than the government's targets in subsequent years." The rating agency expressed similar sentiments about the just-completed 2018-2019 fiscal year, suggesting the government may again have overshot its deficit target - this time by $63.6m to take it to $292.6m.
"We expect the deficit to have reached 2.3 percent of GDP in fiscal 2018-2019, which is above the budget's target of 1.8 percent of GDP but below the 3.4 percent recorded in 2017-2018, as the government recognised 1.4 percent of GDP in arrears and took new expenditure-increasing initiatives, despite raising the VAT rate to 12 percent from 7.5 percent previously," Moody's said.
"During the first nine months of the fiscal year, government revenues grew by 15 percent whereas expenditures increased by five percent compared to the same period in the previous fiscal year. VAT receipts increased by 20 percent as a result of the tax hike whereas capital expenditures contracted by 31 percent during the first nine months of fiscal 2018-2019.
"Moreover, revenue collection for 2018-2019 likely missed the initial budgeted forecast due to delays in implementation of new tax initiatives (for example, on gaming houses), as well as lingering collection issues for some taxes such as property taxes."
Moody's nodded its overall approval of the Government's fiscal consolidation plan, predicting that the reduced fiscal deficits coupled with slightly higher economic growth will start to lower The Bahamas' debt-to-GDP ratio, although improvement will be slow and take some time to come within range of the Fiscal Responsibility Act's 50 percent target.
"Notwithstanding the slow growth recovery, we expect the Government's fiscal consolidation efforts, supported by the new fiscal rules, to contribute to a stabilisation of the debt trend," the rating agency added.
"We forecast the debt-to-GDP ratio to peak at 59.6 percent in fiscal 2018-2019, which remains above the 53 percent median of Baa-rated peers, before declining to 59.1 percent and 57.3 percent in fiscal 2019-2020 and 2020-2021, respectively."
Moody's also hailed The Bahamas' 1.6 percent GDP growth for 2018 as "credit positive", even though this came in below the rating agency's own 2 percent estimate. It is holding to the same 1.8 percent GDP expansion forecast for 2019 as the International Monetary Fund (IMF), believing there are sufficient foreign direct investment (FDI) projects in the pipeline to offset the impact of any US or global slowdown.
"In 2018 the economy started to recover by reporting an expansion of 1.6 percent in real terms, up from 0.1 percent one year earlier. Although the final growth figure came below our estimate of about 2 percent, this recovery after several years of subdued economic performance is credit positive," Moody's argued.
"We expect the economy to expand by 1.8 percent and 1.7 percent in 2019 and 2020, respectively, supported by tourism and foreign direct investment. Fiscal consolidation, both in terms of restrained public spending and higher taxes on consumption, however, may weigh on growth over the coming years.
"The anticipated slowdown in US growth will likely also weigh on The Bahamas' economic outlook. However, this will be partially compensated by the development of the new tourism-related projects that will allow economic activity to remain around its growth potential of 1-2 percent," the rating agency continued.
"Growth has been driven by the tourism sector and foreign investments that have fuelled construction. Tourist arrivals by air increased by 13.8 percent in 2018 after contracting 0.8 percent in 2017. International passenger departures from the Nassau airport were the highest since 2012, supported by the opening of the Baha Mar."
Moody's also zeroed in on Project Sand Dollar, the Central Bank-driven initiative to improve access to financial services and social inclusion by creating a digital version of the Bahamian dollar.
Echoing the IMF's recent assessment, it said: "Through the issuance of an e-currency, the Central Bank intends to improve access to financial services, increase the efficiency of the payments system and reduce cash transactions to tackle money laundering.
"The digital version of the Bahamian dollar can be used for both retail and wholesale purposes and will rely on block-chain technology. The IMF has pointed out that the adoption of an e-currency could entail risks related to cybersecurity and financial stability, and therefore requires compatibility with the current financial infrastructure."